Money Management

April Financial Fitness Challenge--Run a Financial Stress Test

by Susan Tiffany, CCUFC
/ April 4th, 2011

Recently I heard a radio news report about stress tests European banks are conducting. American financial institutions have performed the same kinds of tests. The idea is to project how well a bank will function if different negative scenarios play out. For example, say inflation doubles—what does that do to a financial institution's loan portfolio?
That got me thinking about different financial scenarios in our personal lives. Let's look at some serious "what if" situations:

Gas costs $5 a gallon—How many miles do you typically drive each year? How many cars are in your family? How can you modify your driving to reduce miles traveled? What's your fuel efficiency like, and can you improve that without running costs even higher, say, by buying a new car? Do you have access to public transportation as an alternative; how much will that cost?

Your employer stops contributing to your 401(k)—Is this a temporary change or does it look like it will be permanent? What if it is permanent? Can you increase your own contribution to pick up the slack? What budget adjustments will you make to allow you to do that? Are other obligations—your child's college fund, for example—in good shape? Might you pick up some of the 401(k) contribution that otherwise would go to that college fund, and plan to borrow for college?

You lose overtime pay you've been relying on for years—Has the OT been paying for extras, or does it cover basic living expenses? What's your debt level; can you manage without the OT because you're debt-free except for your mortgage? Can you refinance a loan—your first mortgage and a car loan could be prime opportunities—at the credit union to help make up for lost income? What are your chances of getting a second job part time?

Don't just speculate; calculate the real cost of these setbacks.
For $5 a gallon gas: Say you usually drive 13,500 miles a year, get about 20 miles to the gallon, and have been paying $3.50 a gallon for gas. Your costs will go from $2,363 a year to $3,375—a little more than $1,000 a year or $85 a month. Not pleasant, but likely manageable.

Say more than one of these challenges crops up at the same time, or they all occur.

Now say you own two or more cars—do the math for the family's whole car fleet.

That's life

Month in and month out, we face one financial challenge after another. Usually they're not too extreme but they can take a toll, especially when they come in series as so often seems to happen. So try a range of stress tests:

The motor burns out on the washer. Oh, and of course this happens two months after it goes out of warranty.

Your daughter has a car accident; she's fine but the accident leaves the family car undrivable. Sad to say, the car is worth less than what you still owe on the loan.

You need to be hospitalized while you're 1,000 miles from home on business. Your spouse has to take a leave from work to come and take care of you for several weeks.

Another wrinkle—say more than one of these challenges crops up at the same time. That's life.
There's an old admonition against borrowing trouble. I think performing a stress test actually does the opposite—it borrows peace of mind by helping you prepare in advance for a bad patch. You do that by keeping debt low and building your savings for short-term and long-term goals. Hope for the best—and prepare for the worst.

Financial Fitness Challenge

The neat thing is, conducting a stress test lets you refine your priorities without having to suffer the actual effects of these calamities.
The people at your credit union can help you create a better scenario. They bring you this website and other tools to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter often. Remember to register for the Financial Fitness Challenge.
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Susan Tiffany, CCUFCaskem@cuna.coop